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3 Underrated Producers in the Canadian Oil Sands

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Unconventional oil is rapidly becoming an important and abundant resource in the U.S. As a matter of fact, liquids production is set to increase nearly 26% from 10.4 million barrels per day in 2011 to 13.1 Mmbbls/d in 2019, primarily as a result of the increased production of crude oil and NGL.

The famous Canadian oil sands
The Canadian oil sands represent the second largest reserve of oil in the world. They are also the largest supplier of crude for the U.S. At year-end 2004, the region contained an ultimately recoverable crude bitumen resource of 315 billion barrels, with remaining reserves of almost 174 billion barrels. 

The Canadian oil sands can be divided into three specific regions, Peace River, Cold Lake, and Athabasca. This article will focus on the Peace River region. Notably, this particular area's reserves have been assessed to hold more than 90 billion barrels of oil, thereby representing a substantial catalyst for growth.

Headquartered in Calgary, Alberta, Penn West Exploration (NYSE: PWE  ) operates throughout Western Canada, on a land base of 5.6 million acres. Focused on light oil, the company has more than 1,500 drilling locations in Peace River, the most important drilling inventory area after the Cardium. Furthermore, at year-end of 2012, Penn West had more than 676 Mmboe in 2P (proved and probable) reserves, weighting 71% toward liquids.

Penn West has two pilot projects in Peace River. Seal Main pilot is expected to produce 10,000 Bbls/d, and commissioning is estimated for 2015. The second project, Harmon Valley South, includes three well pilots and would produce 20,000 Bbls/d after ramp-up. Notably, the company produced an average of 140,083 Boe/d in the second quarter and added 30,000 Bbls/d to its daily production; its Peace River assets represent about a fifth of its total daily production.

With approximately 89% of production weighted toward crude oil, Baytex Energy (NYSE: BTE  ) is involved in the Western Canadian Sedimentary Basin and in the Williston Basin in the U.S. In the Peace River area, Baytex has grown its production organically from scratch to approximately 21,000 Bbls/d at Q4 of 2012.

The producer owns 306 sections of oil sands leases, and an independent company assessed Baytex's 2P reserves in Peace River at 110 Mmbbls, accounting for 38% of its total 2P reserves, which represent a significant growth potential. For Q2 of 2013, the company produced 58,236 Boe/d, from which about 40% were produced in Peace River.

My last favorite operator in Peace River is a company a little bigger than the past two, but still set for growth with its presence in the Alberta's oil sands. Murphy Oil (NYSE: MUR  ) is an international oil and gas company with offshore assets in the Gulf of Mexico, the Atlantic, Southeast Asia, and Australia. Its presence in the Eagle Ford shale is also well known, with more than 150,000 net acres in its South Texas property.

Murphy is strongly involved in exploration and production activities in Western and offshore Eastern Canada as well. As a matter of fact, in 2012, Murphy's Canadian production accounted for approximately 33% of its entire production.

The company owns over 316,000 net acres in Peace River with its Seal heavy oil project. Its production comes from horizontal wells, and Murphy is also evolving enhanced oil recovery projects in the area that includes both polymer flooding and thermal recovery. Murphy still has plenty of room for growth in this area.

My Foolish two cents
Peace River holds more than 90 billion barrels of oil in reserves, and some small-cap producers are well established in the area to profit from this abundant resource of oil, recovered from bitumen. The two first companies are growing its total production with quality assets, and the growth will continue to increase as years go by.

As for Murphy Oil, I believe its international exposure could give it an edge over its competitors because of the different markets it could interact with, thus profiting from a certain diversification. However, that exposure could also bring some downsides, like its exposure on different currencies. Nonetheless, its global presence remains a strong asset and its involvement in the Canadian oil sands brings stability and quality to its portfolio.

More ways to profit from the North American energy boom
Record oil and natural gas production is revolutionizing the United States' energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, the Motley Fool is offering a comprehensive look at three energy companies set to soar during this transformation in the energy industry. To find out which three companies are spreading their wings, check out the special free report, "3 Stocks for the American Energy Bonanza." Don’t miss out on this timely opportunity; click here to access your report -- it’s absolutely free. 

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